In recent years, China's KA systems have developed rapidly, with major chains aggressively expanding into third- and fourth-tier markets. The share of modern retail channels in corporate sales is steadily rising; in some first-tier cities, KA sales now account for nearly half of total market volume. Consequently, some well-capitalized large enterprises have gradually brought major retail systems under direct management, while small and medium-sized enterprises (SMEs), burdened by the huge costs of operating modern retail systems, have to leverage distributor channels to run modern retail, aiming to reduce KA operating costs through distributors' networks and customer relationships.
Currently, there are two common cooperation models between enterprises and distributors: one where the distributor negotiates all fees but the enterprise pays the store directly; the other where the distributor advances all fees and the manufacturer reimburses them periodically as per contract. Both models are relatively easy for enterprises to operate, but they share a common problem: costs are difficult to control, often leading to overspending. This manifests in two main aspects:
Excessively high cost ratios, even cost inversion The author once served a private enterprise that required distributors to keep monthly cost ratios within 30%, but many distributors averaged over 50%. One distributor had monthly sales of 50,000 yuan but incurred KA operating costs as high as 80,000 yuan, resulting in cost inversion. While such inversion is not yet widespread, excessively high cost ratios among distributors are very common.
Promotional and marketing expenses are difficult to monitor Enterprises spend large sums on promotions each year, yet see no corresponding sales increase. They have no idea whether the money was spent appropriately, whether it was spent at all, or how much was spent—so large promotional budgets go down the drain.
Such incidents are common. For example, Fei'er Mopian (a product) launched in 2005 failed most directly because of uncontrolled distributor costs, creating significant cost black holes in various regions. The enterprise, unable to bear the burden, had to temporarily suspend operations and seek opportunities for a comeback.
A careful analysis of these situations reveals the following causes:
Numerous retail systems with complex fee structures and internal processes – It is difficult for enterprises to understand the various fee standards and application procedures of major stores. For instance, in Jinan market, due to different relationships between distributors and store buyers, a stack display that normally costs 5,000 yuan per period could be obtained for 2,000 yuan through a distributor.
Imperfect internal expense application processes and lack of monitoring systems – Many enterprises allow distributors to apply for market expenses themselves, with sales representatives or regional managers conducting only formal reviews that cannot verify the claims. Distributors can apply arbitrarily. Alternatively, sales reps may apply based on market needs, but they often lack sufficient knowledge of market costs, leading to inappropriate or excessive applications, giving distributors opportunities. Some sales personnel even collude with distributors to siphon company funds.
Poor customer selection – Some distributors do not share the enterprise's long-term vision and cooperate with the intention of making a quick profit. These distributors specialize in taking on new products from SMEs, exploiting the large initial investment in new product launches to extract market expenses. Since such SMEs often have less standardized internal management and lower-quality sales staff, supervision is lax, allowing these distributors to achieve their goals.
Rushing to open regional markets without finding suitable distributors – Some enterprises, under pressure from performance targets, product launch timelines, or low brand awareness, hastily select a distributor for KA operations without a comprehensive review of regional distributors. Such distributors may have limited resources, carry few products, and have incomplete networks. Entering a new KA system will incur account-opening fees that better-networked distributors would not need. Fewer products increase unit operating costs, and in negotiations with KA systems, such distributors are at a disadvantage, often having to pay a higher price.
Targeted countermeasures can be developed for these problems:
Risk transfer – Since it is difficult for enterprises to fully understand KA costs and monitor their use, and internal process optimization cannot completely prevent cost leakage, the solution is to transfer cost risk by changing the payment object. Cut direct ties between the enterprise and KA, transferring all costs—entry fees, annual contract fees, store promotion expenses—to the distributor. The enterprise compensates the distributor through other means, such as rebates or calculated fixed expense reimbursements.
Distributor selection – Enterprises should be cautious in selecting distributors and must establish selection criteria to ensure they choose distributors suitable for their development. Selection can be based on sales network, financial strength, logistics capability, product portfolio, number of personnel, warehouse area, management capability, and willingness to cooperate. Sales staff should be given as many quantifiable indicators as possible.
Cross-regional KA management – For cross-regional chain KA systems, it should be clearly defined which distributor operates them to avoid vicious competition among distributors in different regions. Additionally, all KA supply prices and retail prices should be unified to prevent malicious price cuts due to competition among different KA systems.
Let's look at a case where an enterprise used these strategies:
A fast-moving consumer goods (FMCG) enterprise in East China set up an independent business unit for a new product launch. This unit's products could only be sold through newly established sales channels. The product was positioned in the mid-to-high-end market, with supermarkets as the main channel. Due to capital constraints, using distributors was already decided. However, the specific distributor operation model was not finalized. After comparing various models of distributor-operated KA and analyzing their pros and cons, senior management made the following decisions:
Adopt a regional exclusive distributor model to guarantee the distributor's sales territory, with all KA systems and wholesale channels in the region covered exclusively by the distributor.
Design reasonable channel margins so that distributors, sub-distributors, and terminal stores all have reasonable profit space. All KA supply prices and retail prices must be executed uniformly, with retail prices allowed to vary within a range set by the company.
Use reverse investigation from terminals to find distributors with the most complete terminal networks, selecting those suitable for the enterprise. Requirements: overall terminal network coverage of at least 70%, KA network coverage of at least 90%, working capital of over 500,000 yuan, at least 5 delivery vehicles, more than 10 sales personnel, and a strong interest in the company's products with confidence in growing together.
Do not provide fixed KA operating expenses; instead, offer a higher channel rebate of 6% of monthly sales. All KA operating costs are to be paid from this rebate, which is returned quarterly. This rebate is not tied to targets but calculated based on actual sales.
Contract requirements: The distributor must achieve 50% shelf presence in regional KA stores within the first month, 65% in the second month, and 80% in the third month. The list of regional KA stores is attached to the contract. The distributor must report the entry status of KA stores to the enterprise at the end of each month. Distributors failing to meet the required shelf presence will have their rebates appropriately deducted.
Cross-regional chain KA will be supplied by the distributor located at the procurement headquarters.
Company-initiated unified large-scale promotional activities will be paid for by the enterprise.
Provide sales personnel support at a ratio of one salesperson per 50,000 yuan in sales.
Monthly reporting: The distributor must provide details of KA stores entered, product details, and sales details at the end of each month for company verification. If the distributor fails to meet market coverage requirements as per the contract, KA operating rebates will be deducted.
Within three months, the enterprise achieved over 80% KA coverage in the target market, with cost ratios controlled within 6%, completely avoiding the cost black hole problem in distributor-operated KA.
Case Analysis:
Let's analyze why this enterprise avoided distributor cost issues:
First, the enterprise set clear distributor selection criteria: KA network coverage above 90% and overall terminal coverage above 70%. This solves three problems: (1) a comprehensive sales network reduces unit operating costs; (2) it speeds up product distribution; (3) it allows distributors to balance KA operating costs by using wholesale and grocery store sales to support KA operations. Many distributors nationwide have very complete networks; some cover an entire prefecture-level city, even delivering a single carton to a small store in a remote town. Such distributors are ideal because they can achieve market balance through strong logistics and comprehensive sales networks.
Second, all KA operating costs are paid by the distributor, not the enterprise, which pays a fixed channel support rebate as per contract. This fundamentally changes the payment method from direct enterprise payment to distributor payment. For the enterprise, all expenses are within its control, eliminating the risk of cost overruns. For distributors, they can reduce KA operating costs through their own networks, utilize existing sales staff for market maintenance, increase per-capita output, and boost sales through intensive regional cultivation to earn more channel rebates.
Third, the contract fixes the distributor's sales territory, ensuring that income from non-KA terminal operations within the region can subsidize KA operating costs, reducing the distributor's business risk and making them more willing to accept the rebate-based model.
Fourth, unifying KA supply and retail prices avoids channel price conflicts, reduces temporary price promotions caused by price shocks, and cuts unnecessary expenses.
Fifth, the distributor must enter a certain number of stores each month and provide monthly details of stores entered, items, and sales volumes for company audit. This prevents the situation where a distributor, after taking on the product, lets it sell passively without entering KA systems, earning rebates through low-cost non-KA sales. The enterprise's requirement mainly prevents distributors from failing to actively expand channels after taking the product. By setting entry speed and time requirements and linking entry status to sales rebates, the enterprise drives rapid store entry. The specific monthly entry ratio can be determined based on local conditions and distributor networks, thus avoiding the situation where distributors avoid KA systems just to earn operating fees.
The advantage of this approach is that the enterprise fully utilizes the distributor's capital, network, and customer relationships to enter stores, transferring all KA cost risks to the distributor. For the enterprise, there are no special expense items, hence no cost black holes. Since KA operating rebates are tied to sales, actual KA operating costs remain within the controlled rebate range and cannot spiral out of control.
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